Government bonds did well during the third quarter offshore, as yields declined and prices firmed. For example, the US government ten year bond yield declined from 4% to 3.8%, while the German government ten year bond yield declined sharply from 4.65% to 4% and the UK government ten year bond yield declined just as sharply from 5.1% to 4.4%. So bonds were a good place to be invested in while the equity markets tumbled.

The fund was mostly a haven of peace and tranquillity during quarter, at least in comparison with equity funds. It declined by around 1.7% in rand terms and by approximately 6.6% in dollar terms. Most of the decline in dollar terms had to do with the corporate bonds that Fidelity holds in their US Dollar Bond Fund, which declined in value as the credit crisis deepened. The Fidelity US Dollar Bond Fund has 25% in government bonds and the balance in corporate bonds. Once the stock market begins to recover and the stress in the financial markets abates, these corporate bonds should recover.

The other huge event that occurred during the quarter was the 12% gain in just three months by the US dollar relative to the euro, a truly extraordinary bounce in such a short period. We managed to capture some of that bounce by switching out of the euro bonds into US dollar bonds, including 25% in the Fidelity US High Yield Bond Fund, which has outperformed the US Dollar Bond Fund for much of 2008, despite its riskier profile. The fund yields 6.5% versus the 4.4% yield of the Dollar Bond Fund.

The offshore bond market did the opposite in the second quarter compared with the first quarter. Bond yields soared, admittedly from very low levels, as economic growth remained better than expected and the soaring oil price (up 35% in the quarter) added to inflation worries. For example, the US Government ten year bond yield jumped from 3.4% to 4%. Overall, the JP Morgan Global Bond Fund lost 4.4% during the quarter in dollars, which is a big smack for bonds. High yield bond funds fared better as they recovered a tad from the hammering they took in the first quarter on the back of the credit crisis.

Your fund declined by just 1% in dollar terms, way outperforming the -4.4% of the global bond fund referred to above. The rand decline was bigger because of rand appreciation of 3.3% during the quarter versus the dollar. We changed the composition of the fund radically during the quarter, taking advantage of extreme bond weakness, selling out of the Fidelity Euro Short-dated Fund and out of cash in favour of the US Dollar Bond Fund (28% of bond holdings), the Sterling Bond Fund (38% of bonds) and the International Bond Fund (11.6% of bonds). The overweighting of the Sterling Bond Fund was partly owing to the 17% fall in the past year of the pound versus the euro, taking the view that the pound may recover some of those rather unusually sharp losses. The other point was a view that the British economy may slide more sharply than the European economy mostly because of the sharp decline in residential property in the UK. If so, this should be good for British bond prices.

Looking ahead, despite heightened fears of inflation because of the extraordinarily high oil price, in the end this may play into the hands of bond investors because economies may slow sharply, which should help lower inflation and be good for bonds. So bonds are probably a good asset class to own in this environment.

The fund had a marginal negative rand return during the quarter to end December (-0.6%), partly because the randgained against 0.8% against the dollar. For the year to end December the fund did 4.8% in rands, similar to SA bondfunds. In dollar terms the return was amore impressive 12%, with the rand gaining7%against the dollar during 2007.

During the quarter the 10 year US Bond yield fell sharply from 4.54% to 4.04%, as recession fears gained strength,leading to capital appreciation in the bond. The fund missed some of the run as it started the quarter underweightduration (underweight in bonds). Later in the quarter we upweighted to a full bond weight in the fund. Bond yields havecontinue to decline in early 2008, reaching a level of 3.7% by the 16th of January, as recessionary fears intensify.

Currency moves contribute materially to the return of offshore bond funds. The fund was heavily overweight in euros formost of the last quarter. This paid off as the dollar lost a further 2.2% against the euro, while sterling was the weakestcurrency by far, losing an unusually large 5.3% against the euro during the three month period. We offloaded the holdingin sterling bonds early in the quarter.

During December and January we have since converted many of the euros into dollars in the belief that the dollar has fornow hit rock bottom.The fund was the top performing fund in its sector for the three years ending December 2007.